In an attempt to tackle the issues in financial management that borrowers could face amid the lockdown for the COVID-19 pandemic, on March 27, Reserve Bank of India (RBI) allowed financial institutions to give a three-month moratorium on term loans and credit card bills. Borrowers can opt-out of paying their equated monthly instalments (EMIs) or credit card fees during this time.
What is the RBI Moratorium?
The RBI has allowed financial institutions to enable a 3-month moratorium on payment of instalments for all loans, including personal loans, home loans, car loans, and more. Top banks are to expand the moratorium option to all their clients, along with housing finance companies (HFCs).
The lending institutions will send communication whereby borrowers will enter a link where they will see relevant information like Moratorium EMI calculator. Things like how many months the loan tenure will increase if they opt for the moratorium and how much the EMI will be increased if the borrower wishes to retain the same tenure.
When the financial institutions notify the lenders, they can apply for a moratorium that will give them three months not to pay the EMI instalment.
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RBI Moratorium – who can opt?
RBI has said interest on the unpaid portion of the loan would continue to accrue throughout the moratorium period. The moratorium term does, therefore, not come in for free. Experts agree this could also dramatically raise the pressure on the borrower due to an increase in loan duration or an increase in EMIs.
E.g., if one opts for the moratorium, the interest rate of this 3-month duration will be added to one’s unpaid principal amount. Accordingly, industry experts suggest the moratorium can only be selected by the borrowers who have an issue with their monthly income and therefore find it difficult to service the loan.
Moreover, lower tenure and principal lenders should not face a significant moratorium burden. In this scenario, if a borrower opts for the moratorium, he/she will see a one- or two-month rise in tenure for the loan, with the EMI remaining equivalent.
The breather could also be leveraged by companies with cash flow mismatches, broken supply chains and reduced demands. Individual borrowers who are experiencing liquidity problems and anticipate financial uncertainty in the foreseeable future, especially those dependent on the worst-impacted sectors, may use the relief to stay afloat.
If the customers take advantage of the EMI moratorium, interest will be charged on the unpaid loan at the agreed rate for the moratorium duration. This value would also be added to the amount already outstanding. Ideally, businesses and individual borrowers with robust financial health and stable jobs will and will continue to repay their EMIs on time, so that they can benefit from the lower interest rate, and do not have interest accruals due to postponement.
Credit offices work with the banks reporting data. But taking advantage of the moratorium won’t affect your credit score.
The three-month moratorium on all term loans and credit card payments will ease financial hardship amid the ongoing COVID-19 crisis on borrowers facing income instability.
Points to ponder
Although many financial institutions have started offering customers the option, there are a couple of things you should think about before you opt for it. Secondly, while there will be no penalty to delay the EMIs, interest on the outstanding balance will continue to accrue. And, relative to paying your EMI, your outstanding for that time would go up. And if your cash flows are not affected, and you are in a position to pay for your EMIs, it is advisable to do so and reduce your loan balance.
Still paying your credit card dues is also relevant. Credit card debt is high. Therefore, if you can start making them on time, it is prudent not to postpone your card payments.
Even if you vote for the moratorium, your credit scores won’t be affected. Consider it a priority, though, to keep track of your credit score by reviewing that every month.
Experts claim that individuals or businesses should be cautious about opting for a moratorium scheme and should ideally analyze their repayment phase and then decide on signing up the programme. If you feel that you can manage your finances well, you can opt against the scheme.